Virtualization software to crush server market

Or maybe not

Analysts and executives came out this week and declared that x86 server shipments will likely decline as VMware, Microsoft and a host of start-ups push their virtualization wares at speed. This thesis du jour centers on the notion that customers will buy fewer low-end systems, since they'll be running more software per box thanks to virtualization technology.

While this may feel like an obvious transition, most server and chip vendors have been arguing against the slowdown idea over the past couple of years. Even when blessed with cost or space saving tools, computer users tend to keep right on buying more gear and just use technology advances to cram greater horsepower in the same space. Now you're being told that virtualization technology will buck this trend.

For example, Sun Microsystems CEO Jonathan Schwartz blamed virtualization technology for Sun's declining server revenue, during a call yesterday with financial analysts to discuss Sun's fourth quarter results. Schwartz told the analysts that virtualizaton in the near-term appears to have a "depressing" effect on units.

Toni Sacconaghi, an analyst with Sanford C. Bernstein & Co., has chipped in on the gloom and doom scenario as well in a new research report.

"As the use of server virtualization rises, a negative impact on x86 server demand appears all but inevitable," he wrote. "While we still forecast positive x86 server unit growth in 2007 and 2008, our forecast calls for shipments to contract in 2009 and for growth to be about zero between 2007 and 2012, compared with historical double-digit gains."

In a rare feat, Schwartz and Sacconaghi also happen to agree about another trend that virtualization will drive. They're claiming that customers will buy larger, more memory- and component-packed servers moving forward to handle the demanding virtualization code. Why consolidate a couple of workloads on a two-socket box when you can consolidate more software on a four- or eight-socket system and deal with less hardware management overhead?

According to Sacconaghi, the trend toward larger systems will hurt Dell, since it has specialized in two-socket gear. It will, however, also hurt Sun, since x86 virtualization will only speed the move away from Unix systems.

Schwartz disagreed here - you're shocked, we know - arguing that Sun's larger system expertise will help it benefit from the virtualization charge. Sun can sell you larger x86 boxes, and it can offer Solaris Containers - arguably a cheaper and more efficient form of virtualization than VMware - on either Unix or x86 kit. In addition, customers doing the virtualization thing tend to "buy more integrated racks rather than piecemeal components," according to Schwartz, which signals higher margin deals for Sun.

Our take on the overall server market tends to overlap liberally with the views held by Schwartz and Sacconaghi. But we're seeing things differently this time around.